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(The opinions expressed here are those of the author, a columnist for Reuters.)
By Jamie McGeever
LONDON, June 6 (Reuters) - Perhaps the most remarkable aspect of Deutsche Bank's dramatic fall from grace over recent years is that it's still Europe's largest player in world financial markets.
The question is whether Germany's biggest bank, with its share price cratering and a derivatives book nudging $50 trillion, can continue to shrink that footprint gradually, smoothly and with minimal market disruption.
The bank's new chief executive Christian Sewing has embarked on a plan to scale back its global investment bank to focus more on Europe and its home market.
The potential for upheaval is greater if it cuts and runs from markets where it is a major force, like FX, credit or structured financing. But it is difficult to envisage Deutsche completely abandoning markets it is so dominant in.
The test for financial markets is whether a bank with such a large and tangled web of exposure can downsize without having a disruptive effect on liquidity, trading and pricing.
Deutsche's gross derivatives exposure last year was over $48 trillion, although net exposure was $20 billion, and investment banking and trading revenue was $14.2 billion. All this was supported by a market cap of only $23 billion.
That's a lot of derivatives exposure for market participants to potentially absorb. As it is spread across multiple players, it makes these links highly opaque, increases uncertainty, and raises suspicion among market participants over who is most exposed.
"If other banks and fund managers are not currently aware of their Deutsche Bank exposure I would be extremely surprised," said Helen Thomas, an independent financial analyst and former banker. "Their risk is not counterparty exposure but market exposure, where Deutsche's decline sets in chain an unwind of positions across the board."
The International Monetary Fund said two years ago that Deutsche, thanks to its links with other lenders, posed a greater risk to global financial stability than any other bank.
Deutsche's share price sank to a record low close of 9.1570 euros on May 31, valuing the bank at just 19 billion euros ($22 bln). That means it is the 83rd biggest bank in the world by market capitalisation, according to Reuters data.
Yet it is still the sixth largest investment bank in the world, according to banking industry data provider Coalition. It is the joint second largest player in global credit markets with JP Morgan, the third biggest in G10 foreign exchange, and joint third in securitisation with Citi.